The Financial Conduct Authority (“FCA”) has published new rules to ensure pension transfer advice considers relevant factors, and is seeking views on additional changes to help consumers make informed decisions for their individual circumstances, including adviser charging structures.

The new rules include requiring pension transfer advice to be provided as a personal recommendation that takes account of a consumer’s individual circumstances. The current transfer value analysis is replaced with a requirement to undertake a personalised analysis of the consumer’s options and a comparison to show the value of the benefits being given up.

Some changes came into force on 1 April 2018, with those relating to the transfer value comparator and the appropriate pension transfer analysis applying from 1 October 2018, and assumptions to use when revaluing benefits being applicable from 6 April 2019.

Areas for discussion in the associated consultation paper aim to improve the quality of pension transfer advice to consumers.

The FCA has decided to maintain the position that an adviser should start from the assumption that a Defined Benefit pension transfer will be unsuitable, reflecting the high proportion of unsuitable advice it has seen in supervisory work and the perceived need for further consideration of how pension transfer advice should be paid for. The existing guidance on the starting assumption does not, however, prevent an adviser from recommending a transfer where this is considered suitable for the consumer.

After seeing a number of pension transfer advice cases following the introduction of the pension freedoms, the FCA published an alert in January 2017 reminding firms of the FCA’s expectations of those advising on pension transfers. Some of the cases they saw generated concerns about poor advice and adviser behaviour, suggesting consumers had given up valuable pension benefits which would probably lead to reduced levels of later life income. The FCA considers that alert remains valid.

FCA Handbook changes

A new definition is added to the FCA Handbook’s Glossary: ‘advising on pension transfers, pension conversions and pension opt-outs’.

The wording: ‘pension scheme which provides safeguarded benefits (article 82(3)) (but only in relation to advising on conversion or transfer of pension benefits)’ is added to the definitions of designated investment, security and specified investment.

The definition of pension transfer specialist is replaced with:

an individual who:(1) has passed the required examinations as specified in TC; and(2) is employed by a firm to give advice on pension transfers, pension conversions and pension opt-outs or to check such advice in accordance with the provisions of COBS 19.1.

A new COBS 9.3.6G is added entitled ‘Pension transfers, conversions and opt-outs’.

The similarly titled COBS 19.1 is amended substantially.

From 1 April 2018 to 30 September 2018, a new COBS transitional provision is in place in relation to COBS 19.1.2R to COBS 19.1.4BR, allowing firms to ‘opt-in’ to the new rules in Part B of Annex B that are not in force until 1 October 2018.

New COBS 19 Annexes are inserted:

COBS 19 Annex 4A ‘Appropriate pension transfer analysis’;

COBS 19 Annex 4B ‘Transfer value comparator’;

COBS 19 Annex 4C ‘Assumptions’; and

COBS 19 Annex 5R ‘Format for provision of transfer value comparator’.

The changes in COBS 19 include:

a new rule requiring advisers to consider the impact of tax and access to state benefits, particularly where there would be a financial impact from crossing a tax threshold/band;

a new rule to clarify that the appropriate pension transfer analysis must consider a reasonable period beyond average life expectancy, particularly where a longer period would better demonstrate the risk of the funds running out;

a revised rule requiring advisers to consider trade-offs more broadly; and

new guidance on considering the safety nets – the Pension Protection Fund and the Financial Services Compensation Scheme in the UK – that cover both the current and receiving schemes in a balanced and objective way.

Within SUP 12 ‘Appointed representatives’, there are minor additions to SUP 12.2.7G ‘Business for which an appointed representative is exempt’ and SUP 12.5.2G.

Pension transfer specialist qualification

In Consultation Paper 18/7, the FCA proposes to require all pension transfer specialists to obtain the investment advice qualification. They are also consulting on changes to the appropriate exam standards for the pension transfer specialist qualification itself, to reflect the updated rules and guidance, and the more widespread changes to the pensions environment.

It is proposed the additional qualification must be acquired by October 2020. As there will be no grandfathering, all pension transfer specialists without the investment advice qualification must achieve it in order to continue practising after that date.

Whilst the FCA is not explicitly preventing pension transfer specialists without the investment advice qualification from practising prior to October 2020, the FCA reminds firms they need to ensure they are meeting their responsibilities for assessing and maintaining the competence of employees (Training and Competence sourcebook section, 2.1, to which substantial changes are being proposed).

Proposed revised definition of pension transfer

In Consultation Paper 18/7, the FCA proposes to amend the pension transfer definition so that it is drafted with reference to safeguarded benefits and flexible benefits.

This will mean that the definition will only cover advice on transactions where flexible benefits are given up when the cancellation rules apply, in the same way as other pension switches. Where such switches involve an FCA-regulated pension scheme (either ceding or receiving), personal recommendations will still need to meet suitability requirements in COBS 9; note the proposed insertion of COBS 9.4.2AR.

Transfers of safeguarded benefits from Occupational Pension Schemes to other fully safeguarded Occupational Pension Schemes are not included within the regulated activities.

If the proposal goes ahead, firms will only be required to report transfers of safeguarded benefits in this category. All other pensions business, including pension switches, will be reported in the relevant product category, e.g. self-invested personal pension, personal pension. However, this change should not affect data reported in the Retirement Income Data Regulatory Returns.

Triage services

A new COBS 19.1.11G introduces initial ‘triage’ services, and a new PERG 12 Annex 1G provides ‘Examples of what is and is not advising on conversion or transfer of pension benefits’.

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